Amazon's boundless spending tested as sales growth slows

By ADAM SATARIANO Bloomberg News

Publication: The Day

San Francisco - Amazon.com's willingness to gain customer loyalty by shouldering the costs of nationwide shipping and access to online movies has its limitations.

After a 20 percent jump in costs led Amazon to miss analysts' fourth-quarter profit estimates, the company said Thursday that it's considering raising the price of its $79-a- year Prime membership for the first time. That service, which includes two-day shipping and endless video streaming, may increase by $20 to $40 a year in the United States, the company said.

Amazon's expenses have been climbing as Chief Executive Officer Jeff Bezos pumps money into new initiatives like warehouses to speed shipments and research on home-delivery drones. While Bezos continues to tout "world-class customer service"-a phrase he used in Thursday's statement-there are limits to how much he's willing to subsidize users.

"They are launching drones for delivery, but when you miss earnings, investing in risky technology like that gets put on the back burner," said Gene Alvarez, an analyst at Stamford, Conn.-based researcher Gartner Inc.

Net income was $239 million, or 51 cents a share, the company said. Analysts on average had projected profit of 69 cents a share, according to data compiled by Bloomberg. Operating costs climbed to $25.1 billion from $20.9 billion a year earlier.

Sales in the holiday quarter increased at the slowest rate since 2008. Revenue rose 20 percent to $25.6 billion, trailing the $26.1 billion average analyst estimate. The company's dominance of U.S. e-commerce isn't translating globally, with international sales growth slowing to 13 percent in the quarter from 21 percent a year earlier.

"What we see is continued growth, but a slowing rate of growth," said Michael Pachter, an analyst at Wedbush Securities in Los Angeles.

Tom Szkutak, Amazon's chief financial officer, said on the conference call with analysts that the potential increase in Prime is the result of higher fuel and shipping costs. The company hasn't lifted the price since introducing the service nine years ago, he said.

"Customers like the service and they are using it a lot more," Szkutak said. He also said additions to Prime such as access to online movies and television shows, which the company must pay to acquire, is adding to the cost of the service.